Question

The Crane Products Co. currently has debt with a market value of $250 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) that have a maturity of 15 years and are currently priced at $1,418.61 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $10.00 per share. The preferred shares pay an annual dividend of $1.20. Crane also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever. If Crane is subject to a 28 percent marginal tax rate. Excel Template (Note: This template includes the problem statement as it appears in your textbook. The problem assigned to you here may have different values. When using this template, copy the problem statement from this screen for easy reference to the values you've been given here, and be sure to update any values that may have been pre-entered in the template based on the textbook version of the problem.) Problem 13.24 a1-a5 (Excel Video)(a1) Your answer is incorrect. Calculate the weights for debt, common equity, and preferred equity. (Round final answers to 4 decimal places, e.g. 1.2514.) Debt Preferred equity Common equity

Answer 1

To calculate the weights for debt, common equity, and preferred equity, we need to determine the market values for each of these components. The weight for debt is 0.4505, the weight for preferred equity is 0.0360, and the weight for common equity is 0.5135.

Step-by-step explanation:

To calculate the weights for debt, common equity, and preferred equity, we need to determine the market values for each of these components. The market value of debt is given as $250 million. The market value of preferred equity is the number of preferred shares outstanding multiplied by the market price per share, which equals 2 million shares * $10.00/share = $20 million. The market value of common equity is the number of common shares outstanding multiplied by the market price per share, which equals 14 million shares * $20.00/share = $280 million.

Next, we calculate the weight for each component by dividing its market value by the sum of the market values of all components. The weight for debt is $250 million / ($250 million + $20 million + $280 million) = 0.4505. The weight for preferred equity is $20 million / ($250 million + $20 million + $280 million) = 0.0360. The weight for common equity is $280 million / ($250 million + $20 million + $280 million) = 0.5135.